30 • CHAPTER 1 / THE WORLD OF PROJECT MANAGEMENT The light-assisted apartments could hold residents who required only minor medical and social interventions. The residents of the heavy-assisted section would have more medical needs and would require assistance getting around. The Business Development team recommended this type of programming model, because many assisted living facili- ties were erected across the country, but few had a medical focus and offered the types of services that Friendly Medical Center could offer—physical and occupational therapy programs and behavior management programs to name a few. The Board was assured that the facility would meet the strategic initiative of a growing business. The business plan projected an immediate increase in the number of referrals to the outpatient therapy programs. Another pro- jected deliverable of the project was to enable Friendly Medical Center to strengthen its focus on reimbursable preventive and wellness programs for the healthier geriat- ric population. The project's longer-term goal was to increase the census in the hospital's inpatient units by having a location where people could age in place until they were in need of hospitalization, and then such a facil- ity would be right next door. Depending on the exact size of the apartments, their equipment, and the actual ratio of heavy- to light-assisted units, Fred estimated that the entire project would cost between $8,500,000 and $11,000,000 for the facility con- struction. That estimate included the cost of land, furnish- ings, and a sheltered connection to the hospital. When up and running, it was estimated that the net income would range between $9,000 and $12,000 per unit per year. The team estimated the net cash flow for the entire project to be around $1,500,000 per year. Fred requested the Board to approve the concept and allow his team to prepare a pro forma plan to the Board for approval. The plan would include a recommended design for both heavy- and light-assisted apartments. It would also include all costs of land, construction, furnishings, and staffing. Income estimates would be included and would be conservatively biased. A timetable would also be included. The Board conducted several executive sessions, and by the middle of May voted to approve the concept. They approved the architectural-construction management firm recommended by the team, and they requested Splient to proceed with developing a complete project plan. The Board appointed two Board members to sit on Fred's planning group. In June, Dr. Splient gathered his executive team together and presented the project mission, and scope. He reported that the board had approved a small budget to finance the planning process. The Board also stipulated that construction could not begin until after the November 20x6 city elections because two of the Board Members were running in that election, one for a city council seat and one as a county commissioner. The Board also stated that they would like a plan that would allow the facility to open by July 20X7, as research has shown that many adult children find the summer the easiest time to assist their parents in finding an alternative to independent living arrangements. The CEO and executive team were now confident that they were ready to launch the project to plan, build, and open an assisted living facility at Friendly Medical Center QUESTIONS 4. What "project selection" procedure was used here? How common do you think this is? How wise do you think it is? 1. Identify as well as you can the three iron triangle constraints for this project: cost, time, and scope. 2. Identify the expected benefits of this project for Friendly Medical Center, 3. Comment on the strategic initiatives resulting from the Board's major strategic planning retreat. Would you consider this a productive retreat? С A S E Handstar Inc. Handstar Inc. was created a little over 4 years ago by two college roommates to develop apps for smartphones. It has since grown to ten employees with annual sales approaching $1.5 million. Handstar's original product was an expense report app that allowed users to record expenses on their smartphone and then export their expenses into a 28. CHAPTER 1 / THE WORLD OF PROJECT MANAGEMENT EXERCISES 1. A 4-year financial project is forecast to have net cash inflows of $20,000; $25,000; $30,000; and $50,000 in the next 4 years. It will cost $75,000 to implement the project, payable at the beginning of the project. If the required rate of return is 0.2, conduct a discounted cash flow calculation to determine the NPV. 2. A company has established a project team to identify a location for a new manufacturing facility. Use a weighted scoring model to analyze three candidate locations (A, B, C) for setting up the new factory. The relative weights for each criterion are shown in the following table. A score of 1 represents unfavorable, 2 satisfactory, and 3 favorable. Location (c) The VP of Finance has looked at your scoring model and feels that tax considerations should be included in the model with a weight of 15. In addition, the VP has scored the locations on tax considerations as follows: A-3, B-2, and C-1. How does this affect your recommendation? 5. Nina has been asked to lead a team that has been tasked with finding a new location for a boutique con- cept her company would like to test. The team has identified four candidate shopping centers to locate the new boutique in. Some cater to a higher class of clientele than others, some are in an indoor mall, some have a much greater volume than others, and, of course, rent varies considerably. Because of the nature of the boutique, the team has decided that the class of clientele is the most important consideration. Following this, the team considered expenses and rent as the next most important criterion-probably 90 percent as important as clientele. An indoor, temperature-controlled mall is a big help for stores such as the concept being considered where 70 per- cent of sales are from passersby slowly strolling and window shopping. Thus, the team rates this as about 95 percent as important as rent. Last, a higher volume of shoppers means more potential sales; thus the team rates this factor as 80 percent as important as rent. As an aid in visualizing her location alternatives, the team has constructed the following table. A "good" is scored as 3, "fair" as 2, and "poor" as 1. Use a weighted score model to help Nina and her team come to a decision A Category Labor costs Labor productivity Labor supply Union relations Material supply Transport costs Infrastructure Weight 20 20 10 10 10 25 5 B 2 3 1 1 2 2 3 С 3 1 3 2 1 1 2 2 3 Location 1 3 4 3. (a) Compare your answer in Exercise 2 to the answer you would have found if you had used an unweighted, 0-1 scoring model. Assume that a score of 1 means does not qualify and a 2 or 3 means it does qualify. (b) Next, revise the unweighted model by deleting all categories that, as recommended, have a weight of less than 20 percent. Compare to your answer to (a) above and also Exercise 2. Which method seems best? 4. Using a spreadsheet for Exercise 2, find the following: (a) What would be your recommendation if the weight for the transport cost went down to 10 and the weight for union relations went up to 25? (b) Suppose location A received a score of 3 for transport cost and location Creceived a score of 2 for transport cost. Would your recommendation change under these circumstances? Class of clientele Rent Indoor mall Volume Fair Good Good Good 2 Good Fair Poor Fair Poor Poor Good Good Good Good Poor Poor 6. Using a spreadsheet for Exercise 5, determine how Nina's ability to negotiate a lower rent at location 3, thereby raising its ranking to "good," will affect the overall rankings of the four locations. INCIDENT FOR DISCUSSION Broken Welds A manufacturer of mountain bicycles designed an auto- mated system for welding bike frames. For 3 years, the sys- tem worked nicely, handling about 1,000 frames per shift. Production was scheduled for two shifts per day. The sys- tem was designed to weld the frame and then to check the quality of each weld. The welded frames were then trans- ported to another plant for assembly. INCIDENT FOR DISCUSSION • 29 Recently, a few of the frames had failed. Careful testing showed that a foreign substance in the welding rod pur- chased from an outside vendor possibly contributed to the failure. When checked, however, the rods conformed to the specifications given to the Purchasing Department and guaranteed by the vendor. The Chief Engineer ordered the Production Department's Project Leader, Alison Passette, to create a project immediately to find out pre- cisely what was causing the failures and to find a way to solve the problem. This project was to take priority over all other projects in the department. Alison was familiar with the Chief Engineer's tendency to overreact to any glitches in the production process, so she decided to determine the impact of the proposed pro- ject on all the other projects in the department. She also discussed the problem with Ken Kelsey, one of her welding experts, who felt sure he could solve the welding problems by determining what foreign substance, if any, caused the problem. He could then set up a system to detect the pres- ence of the substance and reweld the affected frames. Of course, he added, they would also have to change their specifications for the welding rod to eliminate the chemi- cal responsible for the failures. Question: What information does Alison need to deter- mine the probable impact of Kelsey's proposed project on the other projects in the department? Should her findings affect her decision about Kelsey's project? How? С C A S E Friendly Assisted Living Facility—1 Friendly Medical Center, an urban, nonprofit, 450-bed rehabilitation hospital, began to see a significant decline in admissions. Friendly Medical Center's mission focuses on inpatient and outpatient rehabilitation of the severely injured and catastrophically ill. While the patient census varied from month to month, it appeared to the Friendly Medical Center Board of Trustees that the inpatient popu- lation was slowly but steadily declining. The hospital's market researchers reported that fewer people were being severely injured due to the popularity of seat belts and bicycle/motorcycle helmets. In order to get a handle on the future of the organization, the Board, and the CEO, Fred Splient M.D. called for a major strategic planning effort to take place. In January 20X6, Friendly Medical Center held a plan- ning retreat to identify future opportunities. The outcome of the retreat was that the Medical Center needed to focus its efforts around two major strategic initiatives. The first, a short-run initiative, was to be more cost-effective in the delivery of inpatient care. The second, a long-run strategy, was to develop new programs and services that would capi- talize on the existing, highly competent rehabilitation therapy staff and Friendly Medical Center excellent repu- tation in the region. At the time of the retreat, Fred Splient's parents were living with him and his family. Fred was an active member of the "sandwich generation." His parents were aging and developing many problems common to the geriatric popu- lace. Their increased medical needs were beginning to wear on Fred and his family. It crossed Fred's mind that life might be more pleasant if the hospital Board approved an expansion of the Medical Center's campus to include an assisted living facility. In March 20X6, Fred had his Business Development team prepare a rough estimate of the potential return on the investment of an assisted living facility. He asked the team to identify different options for facility construction and the associated costs. The team also did a complete competitive analysis and examined the options for services to be offered based on Friendly Medical Center's potential population base and catchment area. The Business Development team visited several facilities across the country. The team also interviewed companies that could oversee the design, building, and operation of the facility for Friendly Medical Center. The development team pro- duced a preliminary business plan based on the recom- mended structure for the facility, estimated capital expenditure needs, estimated income from operation of the facility, as well as projected revenues to other Medical Center programs resulting from the facility's population. The plan was presented at the May 20x6 meeting of the Board of Trustees. Fred Splient and his team intro- duced the Board to the concept of opening an assisted liv- ing facility on Friendly Medical Center's campus. The facility would be set up as a for-profit subsidiary of the Medical Center so that it could generate a profit and not be subjected to the strict guidelines of the hospital's accrediting agencies. As a subsidiary organization, how- ever, the Board would still have control. The chosen facility design was a freestanding apartment-like facility with a sheltered connection to the Hospital for access to the kitchen and hospital services. The facility would have 100 units with 15 to 30 of the units classified as "heavy-assisted" and built to code to house the physically and medically disabled. The rest of the units would be "light-assisted," larger apartments. The population would be approximately 110 to 150 residents, with most being single occupants rather than couples. 30 • CHAPTER 1 / THE WORLD OF PROJECT MANAGEMENT The light-assisted apartments could hold residents who required only minor medical and social interventions. The residents of the heavy-assisted section would have more medical needs and would require assistance getting around. The Business Development team recommended this type of programming model, because many assisted living facili- ties were erected across the country, but few had a medical focus and offered the types of services that Friendly Medical Center could offer—physical and occupational therapy programs and behavior management programs to name a few. The Board was assured that the facility would meet the strategic initiative of a growing business. The business plan projected an immediate increase in the number of referrals to the outpatient therapy programs. Another pro- jected deliverable of the project was to enable Friendly Medical Center to strengthen its focus on reimbursable preventive and wellness programs for the healthier geriat- ric population. The project's longer-term goal was to increase the census in the hospital's inpatient units by having a location where people could age in place until they were in need of hospitalization, and then such a facil- ity would be right next door. Depending on the exact size of the apartments, their equipment, and the actual ratio of heavy- to light-assisted units, Fred estimated that the entire project would cost between $8,500,000 and $11,000,000 for the facility con- struction. That estimate included the cost of land, furnish- ings, and a sheltered connection to the hospital. When up and running, it was estimated that the net income would range between $9,000 and $12,000 per unit per year. The team estimated the net cash flow for the entire project to be around $1,500,000 per year. Fred requested the Board to approve the concept and allow his team to prepare a pro forma plan to the Board for approval. The plan would include a recommended design for both heavy- and light-assisted apartments. It would also include all costs of land, construction, furnishings, and staffing. Income estimates would be included and would be conservatively biased. A timetable would also be included. The Board conducted several executive sessions, and by the middle of May voted to approve the concept. They approved the architectural-construction management firm recommended by the team, and they requested Splient to proceed with developing a complete project plan. The Board appointed two Board members to sit on Fred's planning group. In June, Dr. Splient gathered his executive team together and presented the project mission, and scope. He reported that the board had approved a small budget to finance the planning process. The Board also stipulated that construction could not begin until after the November 20x6 city elections because two of the Board Members were running in that election, one for a city council seat and one as a county commissioner. The Board also stated that they would like a plan that would allow the facility to open by July 20X7, as research has shown that many adult children find the summer the easiest time to assist their parents in finding an alternative to independent living arrangements. The CEO and executive team were now confident that they were ready to launch the project to plan, build, and open an assisted living facility at Friendly Medical Center QUESTIONS 4. What "project selection" procedure was used here? How common do you think this is? How wise do you think it is? 1. Identify as well as you can the three iron triangle constraints for this project: cost, time, and scope. 2. Identify the expected benefits of this project for Friendly Medical Center, 3. Comment on the strategic initiatives resulting from the Board's major strategic planning retreat. Would you consider this a productive retreat? С A S E Handstar Inc. Handstar Inc. was created a little over 4 years ago by two college roommates to develop apps for smartphones. It has since grown to ten employees with annual sales approaching $1.5 million. Handstar's original product was an expense report app that allowed users to record expenses on their smartphone and then export their expenses into a